1. (SBU) Summary. Econ Minister Counselor met separately
with Deputy Minister for Regional Development (MRD) Vitaliy
Shipov and Deputy Minister for Economic Development and Trade
(MEDT) Andrei Klepach in late April to discuss their
respective Ministry's roles in the first year of President
Medvedev's administration. Shipov said the MRD would carry
out many of Medvedev's highest priority projects, such as
programs on housing and infrastructure. The MRD was also
preparing a Regional Development Strategy, which would be a
companion piece to the 2020 Economic Development Program of
MEDT. Klepach said his Ministry's 2020 plan would be
complete by fall but in addition MEDT was working on a reform
program for the first year of Medvedev's presidency, which
would focus on economic modernization and include tax cuts.
End Summary

2. (SBU) In an April 28 meeting with Econ M/C, Shipov, who
also serves as MRD Minister Kozak's state secretary, said
that many of President Medvedev's highest priorities,
including federal programs on housing and infrastructure
investment projects would fall under the MRD. As a result,
the MRD was likely to take on added importance in the new
government. He said the Ministry had strong political
support from President-elect Medvedev and would receive
additional resources after the change in government in May.

3. (SBU) Shipov claimed that housing construction was on the
upswing but acknowledged that affordable housing remained a
major GOR concern. He expressed interest in reviving a
housing "seminar" that would bring together experts,
including from the U.S., and provide Russia with an
opportunity to learn from the experiences of other countries.
That said, Russia did not intend to solve the current
shortage by creating government housing. It was committed to
private sector solutions, which would be supported by the GOR
through two MRD-managed funds: the Fund to Assist Housing
Maintenance, which would subsidize repairs of existing
housing stock and the Fund on Promoting Housing Construction,
which would sell idle federally-owned land for housing
construction.

4. (SBU) Shipov confirmed that his Ministry now also had
responsibility over the GOR's Investment Fund for major
capital investment projects. He said the GOR commission
overseeing these projects had already approved 20 of them,
including such high-profile ones as the Moscow-St.Petersburg
toll road and the St.Petersburg-Helsinki expressway. The
MRD's plan was to use the Investment Fund to provide seed
money to start the projects but to develop them through
public-private partnerships. Foreign firms would be welcome
to participate.

5. (SBU) Shipov said the authority for many federally-funded
projects would be delegated to regional authorities and
projects would be designed to stimulate regional initiatives.
He added that transferring authority back to the regions was
one of the Ministry's key goals. For instance,
responsibility for social infrastructure, such as education
and health care, along with budget resources had been moved
back to the regions, which "knew better" what was needed
locally. The Ministry would, however, continue to provide
budget support and would monitor regional government
activities.

6. (SBU) Shipov added that the Ministry was an active
participant in developing the GOR's 2020 Economic Development
Program, which was being spearheaded by the Ministry of
Economic Development and Trade (MEDT), and which was
currently being finalized. He added that his Ministry was
also working on a separate blueprint for regional development
through 2020, which he expected to be approved in the fall.

Klepach, told Econ M/C that MEDT was the driving force behind
the GOR's economic development plans, the government's
economic "brains" as it were. He said this included
responsibility for the 2020 Economic Development Program,
which he expected to be complete and approved in the Fall.
However, it also included an economic reform program to be
implemented early in Medvedev's administration. This program
would be ready to be unveiled by summer and would focus on
tax reforms to stimulate consumer spending and value-added
economic activity. The centerpiece would be a reduction in
the VAT rate.

8. (SBU) Klepach said health care and education modernization
would take center stage in the near-term reforms. He said
that the MEDT's reform programs were currently under review
with the Ministries of Social Development and Education. He
said these would be "messy and radical" reforms and very
costly for the federal budget. In addition, the MEDT was
currently working on new ideas and projects that included
federal programs to support the arts, infrastructure projects
for the handicapped, and professional education. He said
that these proposals would be ready by year's end.

9. (SBU) Klepach acknowledged disagreement within the GOR
over the reform program. The Finance Ministry was opposed to
fiscal loosening which it believed would result in lower
government revenues. MEDT, however, believed that the
resulting increased economic activity would pay for itself by
increasing revenues. He was optimistic that a compromise
with the Finance Ministry would be reached. In any event,
Klepach said Russia had pressing needs and some fiscal
loosening was inevitable. Moreover, the current budget
surplus was not sustainable: the price of oil would
inevitably fall and the budget surplus would then shrink.
Modernizing the economy would create more sustainable methods
of supporting fiscal policy.

10. (SBU) Klepach added that in the short-run Russia could
experience some economic turbulence. For instance, he
expected a trade deficit to appear by 2011/12, even if the
price of oil were to remain at or above $70 per barrel. In
addition, the international credit crunch had caused capital
outflow. Although the situation had improved in April and
FDI remained strong, there was still a net outflow so far in
2008. Klepach said monetary policy would have to adjust to
the change in the balance of payments with interest rates
rising and the exchange rate falling.
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